From January 2015 all online retailers selling digital products to consumers across the EU will need to pay VAT in the country of the purchaser. These changes affect all ecommerce businesses selling any kind of digital B2C product, whether or not they are registered for VAT in the UK.
What does this mean, exactly?
From the 1st of January 2015, new VAT place of supply rules come into place for business to consumer businesses selling ‘digital services’. When selling digital services, businesses will need to pay VAT in the country of the customer, rather than the country of origin.
Precisely which businesses are considered to be selling ‘digital services’ is not fully defined as this is a ‘rapidly growing sector’, however examples of businesses that will be affected include any supplier of:
- Video on demand
- Music downloads
- Online broadcast services
- Online newspaper and magazine subscriptions.
Why is this happening?
The internet and digitisation of sectors such as the music industry and publishing has led to a huge change in the way consumers are purchasing these products. Digital products can easily be purchased from anywhere in the world, but until now VAT has been based on the country where the company are based. This has of course led many major sellers of digital products such as Amazon and Apple to base their EU operations in countries, such as Luxembourg, with low VAT rates. As a result, other European countries don’t receive VAT for purchases at those stores.
The globalisation of ecommerce also makes it difficult to track who is owed what, a finding confirmed in a report by the EU which found that as much as €192 billion in VAT was unaccounted for each year.
Who does it impact?
Although it affects all sellers of digital products to consumers, small and medium businesses are ultimately likely to feel the biggest impacts of this change. The large corporations who some might say have caused the introduction of this rule are likely to have sufficient resource to make the changes required to comply. Smaller companies will now have a new administrative burden, the cost of which may have to be passed to the end consumer.
B2B ecommerce sellers are unaffected.
Changes in pricing are inevitable as a result of the change, VAT on digital products varies wildly across the EU, and this will need to be taken into account when setting prices.
Some help is available in the form of HMRC’s Mini One Stop Shop, which means businesses do not have to register for VAT in every country they sell to. However they will still need to collect new information from purchasers to provide the two forms of proof of location that are now required, plus submit a return four times a year.
Exactly how this change will affect UK businesses, as well as the impact on the prices we pay for digital services, remains to be seen. The legislation seems to have slithered through with no thought by politicians as to the detrimental affect it will have on thousands of micro and small businesses worldwide who now have to account for VAT on behalf of the EU. Many US digital suppliers are already closing their doors to EU consumers to circumvent the red tape.